TMI Blog1998 (7) TMI 696X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government of India. The name of the hospital, after the advent of the research centre, was changed from National Hospital to P.D. Hinduja National Hospital and Medical Research Centre . 2. The memorandum of association of the society contains the following objects for which the society was established : (3) The objects for which the society is established are to conduct and maintain a hospital which will hereafter be named as 'Parmanand Deepchand Hinduja National Hospital Research Centre for the reception and treatment of persons suffering from illness or for the reception and treatment of persons during convalescence or of persons requiring medical attention and these activities are carried out solely for philanthropic purposes and not for the purpose of profit and without prejudice to the generality of the foregoing : (i) to conduct and maintain a research centre for research work in diseases, medicines and medical relief; (ii) to provide medical and surgical treatment to persons irrespective of caste, creed or religion whether as in-patients or out-patients; (iii) to provide, conduct and maintain a medical dispensing department, operation theatre, x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt under s. 10(21) of the Act upto and including the asst. yr. 1987-88. For the first time in the asst. yr. 1987-88, the AO took the view that in order to claim exemption in respect of the income under s. 10(22A) the assessee should be a philanthropic institution which, according to him, meant that the hospital should treat poor persons free of charge or at a highly concessional rate. Accordingly to him, the hospital was being run on commercial lines. He noticed that the assessee had a profit motive inasmuch as the treatment given to patients depended on their financial status, the charges levied depended on the classes to which they were admitted and further that service charges of 20 per cent of the bill amount were charged. The criterion of the AO for the purpose of securing exemption, in addition to what has been already stated, was that the hospital should maintain itself through donations, charities and other income, without depending on the charges collected from the patients. In his view the assessee flouted these criteria, was run on commercial lines with a view to earning profit and, therefore, the exemption could not be granted. He, however held that the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . yr. 1989-90, the CIT(A) struck a different note. He held that merely because the hospital charged high rates from upper class patients for special deluxe rooms and suite, it did not follow that it existed for purposes of profit and not for philanthropy. He also recorded a finding to the effect that there was no evidence to show any diversion of the funds or profits for personal purposes of the trustees of the hospital. He also noticed that the deficit in the working of the hospital for the year amounted to ₹ 2,40,60,000. He therefore, held that the assessee was entitled to the exemption under s. 10(22A). For the asst. yr. 1990-91 the same order was followed by him and the assessee was held entitled to the exemption. 8. In respect of the asst. yr. 1991-92 a slightly different complexion arose in the case. Apart from the receipts from the hospital, the assessee was also in receipt of certain other income such as interest from banks and UTI, profit on sale of units, income from gift shop and donations received and credited to the general fund account. The CIT(A) held that even though the assessee was entitled to the exemption, it was not every income received by the hospita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose is a philanthropic one and the purpose of earning profit is to spend it for the achievement of the main philanthropic purpose by redeploying the profits in the same institution or another similar institution. It is noteworthy that in the context of s. 11, the Supreme Court has, in the decision cited supra relied on by the Kerala High Court, held that the charitable organisation is not required to carry on its activities in such a manner that it does not result in any profit, which would be an impractical task for the persons in charge of the trust. As regards the second condition, the Kerala High Court held (p. 314) that free treatment to the poor and needy cannot be the sole philanthropic activity of a hospital because eleemosynary is not one of the essential ingredients of philanthropy. 12. Hon'ble Justice Narayana Kurup wrote a separate judgment agreeing with His Lordship Justice John Mathew. In the separate judgment, His Lordship observed that the expression philanthropic purpose assumes importance because the section requires that the hospital or institution should not exist for purposes of profit and that though the expression is popularly used, its legal connot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hospital are utilised for the purposes or objects for which it was established and there is no attempt on the part of the institution to accumulate the surplus without spending the same for philanthropic purposes, then the hospital must be taken to exist not for purposes of profits. 16. The above principles have also been recognised by the CBDT in their Circular No. F. No. 194/16-17II(AI) which has been reproduced at p. 453 of, Birla Vidyavihar Trust vs. CIT (1982) 136 ITR 445 (Cal). 17. We may now turn to the facts of the case before us. As already stated, the assessee is a society registered under the Societies Registration Act. It is also required to comply with the Bombay Public Trust Act, 1950, having been registered under the said Act also. At p. 47 of the paper book, a copy of the certificate dt. 4th August, 1990, issued by the Assistant Charity Commissioner, Greater Bombay Region, Bombay, has been furnished. The certificate shows that the hospital has, apart from complying with the provisions of the Bombay Public Trusts Act and maintaining prescribed registers according to the rules framed thereunder, also reserved and earmarked 10 per cent of the total number of ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24,673* 1988 14,907* Year ending 31st March, 1989 24,531* Year ending 31st March, 1990 18,975** *(Figures as per certificates issued by DHS-pp. 48 to 51 of paper book) **[Figures as per order of CIT(A) for asst. yr.1990-91] 19. We have already seen from the judgment of the Kerala High Court in Pulikkal Medical Foundation (supra) that free treatment of poor patients is not one of the essential ingredients of philanthropy. The Kerala High Court have observed that free treatment of the poor and needy cannot be the sole philanthropic activity of a hospital but have hastened to observe that one of the philanthropic activities which a hospital can pursue should be to render free treatment to the needy and poor. This test is answered in the present case as we have found that there is a scheme for treating poor patients free of cost. The details have been given in the above chart for some of the years. At our instance, the assessee has furnished before us the copies of the relevant forms which the patients requesting free or concessional tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Khanna Associates on 23rd November, 1991. Though a certificate dt. 16th April, 1990, was filed at p. 60 of the paper book, at our instance a certificate dt. 23rd November, 1991, has been furnished by the assessee in the additional papers which shows the deficits from 1961 to 31st March, 1991, covering a period of 30 years. Following are the details of the deficits : Financial year Deficit amount for the year (Rs.) 1961 (January-December) 11,003.96 1962 32,965.66 1963 59,570.92 1964 72,442.05 1965 1,16,197.34 1966 93,989.92 1967 1,20,132.92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is difficult to imagine that the assessee would have refrained from hiking the rates for paying patients so as to cover up or substantially reduce the deficit. After all it is common knowledge that there is a crying need for speciality medical services and in a place like Mumbai there would be no dearth of patients willing to pay whatever is charged so long as top class medical services are made available. But going by the huge deficits especially from 1986, the year in which the new block was inaugurated, it is difficult to come to the conclusion that profit motive has been the driving force behind the running of the hospital. The income and expenditure account of the National Hospital for the year ended 31st December, 1986, shows that out of the collection of ₹ 37.59 lakhs from the patients, and interest income of ₹ 5,411 and other income of ₹ 33.445, the major part has been spent towards salaries and allowances of ₹ 25.10 lakhs, medical expenses of ₹ 4.74 lakhs, hospital expenses of ₹ 9.08 lakhs and administrative expenses of ₹ 1.62 lakhs. After providing for depreciation, there is a deficit of ₹ 3,68,065 which has been transferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oked upon as signs of luxury but they have to be and in fact they are looked upon as part of the patient-care, especially in the psychological aspect of the treatment. It should also be remembered that most of the modern and sophisticated medical equipment requires clean and dust-free atmosphere which is ensured by central air-conditioning, In our view, therefore, these are matters which are not relevant for judging the motives in running the hospital. The section exempts profits from tax and it is an implict assumption that there would be profits. If there are no profits there is no question of any exemption being granted. The condition is that such profits should be incidental to the dominant object which should be philanthropic and earning of profit should only be a means to feed the philanthropic purpose. When the assessee has consistently suffered deficits, the position is a fortiori . 24. Much has been made by the AO on the fact that the assessee was charging service charges of 20 per cent on the bill which indicated a profit motive. 25. The assessee's explanation, which also forms part of the papers submitted by it at our instance, is that the practice of levying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tient, it would not be possible to arrive at a proper conclusion from such a minute examination of the matter, which we are afraid would result in missing the woods for the trees. An overall or broad perspective of the matter would, in our opinion, be better suited for ascertaining the object in running the hospital. After all, all the receipts and the expenses have been recorded and are exhibited in proper manner. It is nobody's case that there are certain receipts or expenses which have not been taken into account. It is also nobody's case that the expenses are not incidental to the running of the hospital. If that is the case, the deficit itself is an indication that the hospital is not charging what is should, in order to break even. We should also bear in mind the note of caution sounded by the Supreme Court in Surat Art Silk's case (supra), referred to by the Kerala High Court in Pulikkal's case (supra), that it would be difficult for persons in charge of a trust or institution to carry on the activity in such manner that the expenditure balances the income and there is no resulting profit and further that such an exercise would not only be difficult of practi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are that certain portion of the premises belonging to the medical research centre has been given to India Overseas Bank (ICB) for running an extension counter of the bank for facilitating services such as collection of patient deposits, bills of patients, etc. The bank has been provided with security and the employees are supplied subsidised food and beverages. For these facilities the assessee receives ₹ 1,00,000 from the bank. This amount as well as the other amounts of income have been treated by the CIT(A) as income earned not in relation to the medical research activities and was therefore, not entitled to the exemption under s. 10(21). We are however unable to uphold the view taken by the CIT(A). It is true that the assessee has two separate activities : the hospital and the medical research centre. It is also true that separate accounts are being maintained in respect of both. But it should be remembered that the assessee is one and the same. If a part of its activities is eligible for exemption under s. 10(21) the same should be granted, provided that part of the activity satisfies the conditions of the section. 31. We have already seen that in the circular (cited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of the research. The major item of income is the amount of ₹ 96,22,147 which is the amount recovered from the National Hospital for the use of the assets belonging to the medical research centre. This requires a little explanation. When the assets allocated to the hospital are used by the medical research centre or vice versa, entries are made in the account of the hospital and the medical research centre, as the case may be, showing notional receipt or notional expenditure without actual amounts being transferred. The CIT(A) has observed that there is no real income arising out of such notional entries. During the year the position is as under : Rs. Amount transferred to medical research centre by the hospital 96,22,147 Amount received from the medical research centre 76,27,905 Net 19,94,242 33. This amount represents the amount payable by the hospital to the medical research centre for use of its assets by the hospital. Since entries undisputedly are only notional and actual transfer of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for purpose of profit. The Calcutta High Court in the case of Birla Vidyavihar Trust (supra) and the Madras High Court in the case of CIT vs. Aditanar Educational Institution (1978) 118 ITR 235 (Mad) have held that there must be some correlation between the income earned and the purpose sought to be achieved, which in this case should be a philanthropic purpose. The Madras High Court, in the context of s. 10(22), has held that interest received from a deposit made by an educational institution with the university is exempt because it has a direct relation to the institution which imparts education. Applying this test to s. 10(22A), it has to be seen whether the income has a direct relation to the hospital or the medical research so that it may be said to be exempt under s. 10(22A). In our opinion, out of the five items of income referred to by us earlier, except the service charges of ₹ 1,00,000 received from Indian Overseas Bank, which has a connection with the activities carried on by the assessee, the other items of income cannot be stated to have any connection with the philanthropic purpose for which the assessee has been established. Therefore, the amount of ₹ 7, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the property was agreed to be sold and the vendee was also put in possession of the same and was in receipt of the rent. Having regard to the recent judgment of the Supreme Court in CIT vs. Podar Cement (1997) 226 ITR 625 (SC), the vendee must be taken to be the owner of the property. The assessment of the amount of ₹ 5,000 in the assessee's hands is therefore, not correct in law. The addition is deleted. The assessee's appeal is allowed. 40. In the appeal by the Department the first ground is that the CIT(A) ought to have confirmed that the voluntary contribution of ₹ 4,00,05,000 represented the income of the hospital and not of the medical research centre. It is pointed out that in respect of these donations, receipts were issued to the donors by the hospital but the amounts were credited in the medical centre's books. The CIT(A) has dealt with this issue in paras 39 to 41 of his order. The CIT(A) noticed that the assessee issued two kinds of receipts, one for the purpose of enabling the donor to get deduction under s. 80G and the other for the purpose of enabling the donor to get deduction under s. 35(1)(ii). Specimen copies of these receipts wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47. Thus the appeal by the Department is dismissed. Asst. yr. 1989-90 48. The assessee has not filed any appeal for this year. 49. In the Department's appeal the first ground is against the decision of the CIT(A) exempting the assessee under s. 10(22A). In line with our decision for the earlier years, we uphold the assessee's claim for exemption and reject the ground. 50. The second ground relates to the allowance of depreciation on assets of the medical research centre. The third ground relates to the gift of medical equipment of the value of ₹ 1,30,71,000 which according to the Department should not have been exempted under s. 10(22A) or under s. 11 since there was a contravention of the provisions of s. 11(5). The CIT(A) has considered the question of depreciation on assets of the medical research centre in paragraph 6 of his order. He has issued certain directions to the AO in the said para to the effect that the AO should consider the claim according to the provisions of law and should allow depreciation on the actual cost or written down value, as the case may be, according to law. So far as the gift of medical equipment is concerned, this is discus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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